1H16 turned loss making, with net loss of RMB-432m, down 226% yoy
Sinofert posted 1H16 results with a net loss of RMB432m (EPS RMB-0.06),down 226% yoy. The sharp fall was mainly due to: 1) sluggish fertilizer pricescaused by lower grain prices; 2) failure to pass through resumption of VAT; 3)increase in finance costs on QSLI deal, 4) write-downs on QSLI stakes/inventory of RMB60m/RMB26m; and 5) SG&A increased by 10% yoy. Thecompany also, recorded an operating loss of RMB330m, down 167% yoy, andnet operating cash outflow of RMB414m in 1H16.
Sluggish results in both the marketing and manufacturing segments
The marketing segment turned loss making (including associates & JCEs), atRMB-16m (down RMB476m yoy), driven by ASP drops across products (avg -17% yoy); thus, GPM fell 1.4ppts yoy to 3.2%. Noticeably, potash GP fell 99%yoy by digesting high-cost stocks. Also, total sales volume fell 36% yoy.
The manufacturing segment recorded a loss of RMB286m (includingassociates & JCEs), down from profit of RMB59m in 1H15. GPM dropped to4.4% from 10.3% in 1H15, due to the sluggish fertilizer ASPs and the failureto pass through reinforced VAT to customers. According to management,c.85-90% of nitrogen fertilizer producers in China were loss-making in 1H16.
Valuation & risks; maintaining Hold rating
We maintain our Hold rating, with an SOTP-derived target price ofHK$1.1/share. Sinofert looks fairly valued, despite trading at a depressed 0.4xP/B valuation, in our view. The China overcapacity situation should sustain inthe near term, but we believe fertilizer prices will edge up in 2H with majorcommodities prices to stabilize with a gradual rebound. Upside/downside risk:fertilizer price volatility, consolidation of fertilizer industry, government policy.